Business

Froth subsides amid concerns about childcare oversupply

Concerns about oversupply have taken the froth out of childcare centre valuations, ahead of a more generous government fee subsidy scheme that is expected to restore at least some buyer confidence.

Childcare centres were the most popular commercial property in 2017, with individual and institutional investors alike attracted by robust leases and reliable long-term demand driven by increased female workforce participation.

“Investors have realised that while childcare can be lucrative it isn’t a licence to print money.”

Availing of the buyers market for centre lessees and parents alike, the listed Think last week announced the purchase of four leasehold centres at a cost of $5.7 million.

The centres, in undisclosed locations in Melbourne, Sydney Perth and in Tamworth, will be funded by a $10 million institutional placement.

Centre operators and owners of the underlying property cite challenges including falling occupancies and fee discounting, coupled with excessive new supply in some regions.

Occupancy rates have been crimped by the federal government’s current subsidy scheme that caps benefits at $7500 per child per year.

According to G8 Education – the second biggest operator behind the not-for-profit Goodstart Learning – oversupply has become apparent in some inner city parts of Melbourne Sydney and Brisbane, but with an ongoing dearth of places in Western Sydney.

Sluggish wages growth in Western Australia and Queensland has also hit demand.

“Market conditions were challenging (in 2017) with significant levels of new supply and continued weak growth having an impact on occupancy levels,” G8 said.

G8 Education’s recent full-year results showed an overall rise in spare capacity across its 495 centres, from 79.9 per cent to 76.7 per cent.

In response to the “challenging” conditions, the listed property trust Arena Reit is tapering its slate of new centre development.

According to the fund, 276 net new centres opened nationally in calendar 2017, a circa 4 per cent increase.

Arena outlines a $45 million development pipeline of seven centres, compared with 11 projects worth $68 million completed during the half.

Mr Edwards said one agent had been advertising 11 centres for lease for several months. “They would have gone in about five seconds three or four months ago.”

But he said with the banks demanding stricter covenants and loan ratios, the market was returning to more sustainable levels.

That hasn't stopped an investor paying $3.8 million for a centre in Ravenhall in Melbourne's west, one of the first sales of the year executed on a passing yield of 5.8 per cent.

The 130-place newly-built centre at 3 Nexus Street had a new 15 + 10 year lease to tenant Kool Kidz returning passing rental of $225,000 per annum with built-in rent growth.

In another deal, a Little Seeds Early Learning Centre in Newport, also in Melbourne's west, sold off the plan for $8.1 million.

The centre, at 519 Melbourne Road, is under construction and is expected to open in October. Early Seeds has a 15-year lease returning $520,000 a year giving the deal a yield of 6.3 per cent.

The firm recently sold two centres in Blackburn (eastern Melbourne) and Preston (northern Melbourne) on tight yields of 4.72 per cent and 4.4 per cent respectively.

CBRE has sold nine centres over the last 12 months for an average $9.63m price and an average 5.08 per cent yield.

The institutional childcare operators expect demand to improve when the federal government’s new Jobs and Families package becomes effective from July 1.

The scheme, costed at $8.8 billion in 2018-19 will remove the per-child cap for families earning income up to $185,710, with the benefit reducing on a sliding scale to $340,000 when the benefit cuts out completely.

The pending change may already be restoring market confidence, with G8 Education reporting stable occupancy rates in January, with forward bookings “heading in the right direction”.

CBRE suggests the pending changes - coupled with last year’s 3 per cent increase in the number of children in childcare - are sustaining valuations.

In a recent report, specialist childcare agent Burgess Rawson said buying interest had resulted in average childcare centre yields falling to around 5.84 per cent and as low as 3.57 per cent (for a centre in Sydney’s blue chip Vaucluse tenanted by G8 Education).